Lean for Service Organizations: What the Customer Wants

The fourth principle in Lean Consumption (or Lean for Service Organizations is¹: Provide exactly what the customer wants, where it is wanted

This principle rests on the notion of convenience and price.

Based on experience, we pay a lot for convenience. But, the Lean for Service Operations mindset takes a different route. It is possible to provide price competitive products or services and make them convenient to to obtain. Again, Womack shares a case study from Tesco:

For instance, the reason Wal-Mart sells hammers more cheaply than the corner hardware store isn’t that the scale of Wal-Mart’s order reduces hammer production costs or that the store’s size significantly reduces its costs. It’s because the scale of Wal-Mart’s order causes the hammer maker to accept a low selling price in return for volume, and Wal-Mart passes on this savings to its customers.

The opportunity is ripe for large retailers using lean logistics techniques to offer a complete range of formats with uniform pricing to serve every customer need. Tesco is already doing this. It has created a full complement of formats ranging from local convenience stores (Tesco Express), to midsize stores in town centers (Tesco Metro), to standard-size supermarkets in the suburbs (Tesco Superstore), to hypermarkets on the periphery (Tesco Extra), to Web-based shopping (Tesco.com). By integrating the fulfillment channel behind all these formats, Tesco is answering an expanded array of consumption needs.

One result of this efficient channel sharing is that Tesco seems to be the only grocer making money on Web-based grocery shopping while continually increasing sales volume. Another, more provocative consequence is that all of the goods entering this unified fulfillment channel benefit from the same purchasing power: The tube of toothpaste going to the tiny Tesco Express outlet costs Tesco the same amount to buy from the supplier as the tube going to the vast Tesco Extra store, and the fulfillment cost is very nearly the same as well.

This strongly suggests that the age of mass consumption retailing, in which the industry keeps heading toward ever larger formats, is coming to an end. Why drive miles to a big box if the items you want are available nearby from a smaller format at the same prices?

In other words, one an take advantage of the purchasing power that comes with large quantity purchases, but provide those goods and services closer to the customer.

Groupon: A Case Study

Groupon is an ecommerce company that aggregates merchandise and sells them to customers in certain locales. By doing this, Groupon is applying the principles of Lean for Service Operations by aggregating quantity purchases (though they don’t purchase inventory – they call it collective buying) and making that merchandise available close to the customer. These local deals are a hit, suggesting that the principles of Lean for Service Operations work in practice, not just theory.